The fact new reinsurance start-ups, the so-called Class of 2020, have no legacy portfolios of risk and so are unencumbered by recent years of catastrophe losses, exposure to the COVID-19 pandemic and issues such as social inflation, makes them the best opportunity to invest in the rising reinsurance tide, according to analysts at Jefferies.
The Jefferies equity analyst team were thinking specifically about Conduit Re, but the same is true of all unencumbered and legacy free reinsurance start-ups at this time.
Of course, these investments still come with exposure to the pandemic, as being a traditional reinsurer with an asset portfolio developing, they still have exposure and correlation to global financial markets.
Which is why insurance-linked securities (ILS) funds are often the preferred vehicle for tapping insurance and reinsurance market returns for some institutional investors, as they come without the correlation (generally).
But, for many investors, access to ILS funds isn’t so simple, compared to buying shares in a listed reinsurer like Conduit Re.
Start-up reinsurance companies offer investors a chance to “get back to the future, where rising rates, higher margins and growth opportunities abound,” Jefferies analyst team said in a report this morning.
The reason the unencumbered start-ups are seen as so preferable, is the fact legacy players are often struggling to deploy capital into the firming rate environment, given the drag on their businesses from prior years and the pandemic itself.
“Many incumbents are struggling to grow their volume into this cyclical turn, as they come to terms with the cost of catastrophes and the pandemic, as well as the negative reserving after-effects of the previous deflationary market,” the analysts explained.
Where as a start-up, like Conduit, raised its capital freshly to take advantage of the opportunity right now and into the future, “offering investors exposure only to the better priced new business, and is thus the best opportunity to invest in this theme,” Jefferies believe.
It’s not just the lack of legacy in their risk portfolios. There is also the lack of legacy systems to consider as well, Jefferies said.
With no back book concerns and the ability to only embrace systems that are modern and work to their advantage, start-up reinsurance companies like Conduit have an advantage over some legacy players.
In particular, we’d say some of the smaller to mid-sized reinsurers may find themselves fighting a losing battle against the new capital that has come into the market, if they cannot deal with legacy issues effectively.
One word of caution though. The Jefferies analysts talk about track-records, but these are rarely as clear-cut as they seem and investors should do their own diligence on management teams before selecting where to allocate capital.
There’s a lot of choice, for places to invest right now in reinsurance, especially for investors of a certain size.
It is important not to rush such decisions and also to remember that what is shiny and new may not always be profitable. While sometimes, legacy and experience also counts for a lot.